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Red Sea Attacks and Panama Canal Drought: How Impacts on Global Trade Routes & Prices

Red sea
  • Global trade is the lifeblood of the modern world, keeping shelves stocked and factories humming.
  • In recent times, critical maritime routes like the Red Sea and the Panama Canal are facing disruptions that could significantly affect over a third of global trade.
  • This looming crisis has emerged from a series of attacks on ships traversing the Red Sea.
  • Particularly affecting a ship en route to India, causing tensions among oil importers and exporters dealing in commodities like basmati and tea.
  • The Red Sea attacks, attributed to Yemen-based Houthi rebels, are a response to Israel’s military actions in Gaza.
  • These disruptions underscore the significance of these routes for global trade.
  • Exacerbating concerns alongside existing challenges such as slowing demand in Western markets and China’s property crisis.
  • Which has led to a 50% reduction in goods trade forecast by the World Trade Organization (WTO) for 2024.

 

Understanding the Red Sea Ripples

  • Drone attacks in the Red Sea, notably on the MV Chem Pluto bound for India, raised concerns among Indian oil importers and exporters of goods like basmati and tea.
  • The attacks, Yemen-based Houthi rebels, stem from conflicts with the Yemeni government.
  • And are linked to protests against Israel’s military actions in Gaza.
  • The resulting tensions have raised concerns globally, leading to swift countermeasures by a US-led maritime security coalition.

 

Impact on Global Trade Routes

  • The Red Sea and the Panama Canal serve as vital arteries for international trade.
  • Any disruptions here cause ripples felt worldwide.
  • Over 80% of global goods trade is conducted through maritime routes.
  • The blockages force ships onto longer alternate routes, driving up freight rates and complicating delivery schedules.

 

Implications for India and Global Markets

  • For India, the disturbance at the Red Sea could inflate the prices of agricultural products by 10 to 20%.
  • Shifts in shipping routes, diverting through the Cape of Good Hope, would contribute to longer transit times and increased costs.
  • • This turmoil arrives at a time when the West faces higher interest rates to combat inflation, potentially impacting global and Indian exporters’ demands.

 

Why is Trade via the Panama Canal slowing?

  • The Panama Canal’s woes compound the global trade difficulty, with shipping via the canal falling by over 50% due to drought conditions.
  • Ships rerouted from Asia to the US through the Suez Canal take six extra days, exacerbating delays and logistical challenges.
  • Panama is grappling with an unprecedentedly dry rainy season, heightening worries of extended canal holdups.
  • To expedite transit through the Panama Canal, LNG vessels engage in high-priced auctions.
  • In early November, one vessel paid almost $4 million for an open slot.
  • Forecasts indicate a potential halving of Very Large Gas Carriers transiting the canal by February 2024, raising concerns of a complete halt by January.

 

Impact on Oil Flows and Freight Rates

  •  Global oil and petroleum product flows have fallen due to the Red Sea attacks, causing oil prices to spike by over 5%.
  • However, Indian oil imports from Russia, perceived as Iran’s ally, have remained immune.
  • The disruptions have prompted global shipping firms to impose war risk surcharges.
  • Potentially leading to a surge of 25-30% in freight rates for Indian shipments to Europe and Africa.

 

Future Outlook and Potential Resumptions

  • During these challenges, the deployment of a US-led coalition in the Red Sea offers hope for restoring shipping operations.
  • Yet, uncertainties persist, prompting companies to consider continued ship traffic diversions based on evolving safety conditions.

 

Conclusion:

The Red Sea is facing attacks from Yemeni rebels, which has caused shipping companies to take longer routes and raise prices. The Panama Canal is experiencing a drought, which is limiting the number of ships that can pass through. These disruptions could have a significant impact on India, as they could lead to higher prices for agricultural products and oil.

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References:

  • Red Sea [1].

Frequently Asked Questions

The Panama Canal route is crucial in international trade for its role as a shortcut between the Atlantic and Pacific Oceans. It significantly reduces travel time and costs for ships, facilitating faster and more efficient transportation of goods. This shortcut has a profound impact, allowing for increased trade volumes, lowered shipping expenses, and greater economic connectivity globally.

The Suez Canal is vital for international shipping due to its role as a direct passage between Europe and Asia. It significantly shortens travel distances, reducing shipping time and costs. This waterway enables efficient trade by allowing ships to bypass the longer and more hazardous journey around the southern tip of Africa.

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